Papua New Guinea: Year in Review 2018

A 7.5-magnitude earthquake and its subsequent impact on the mining and energy sectors led to a difficult year for Papua New Guinea in 2018; however, new investments from foreign players should reap dividends moving forward.

The February 26 earthquake – along with its series of aftershocks – that struck the central-western Hela Province was the most significant event of the year, causing the deaths of around 200 people and severely damaging much of the country’s industrial infrastructure.

For example, Oil Search – one of the country’s leading oil and gas companies – experienced a 17.5% year-on-year (y-o-y) contraction in revenue in the first half of the year, a result of a 31% y-o-y drop in production.

The earthquake also had an impact on outward shipments, with the value of national exports dropping by 8.3% y-o-y between January and June, according to the Bank of PNG. Of this, mineral exports were down by 6.5% and liquefied natural gas exports by 14.3%.

The significant impact on the minerals and hydrocarbons industries, which account for about 25% of GDP and 80% of the exports, according to government estimates, weighed heavily on year-end economic forecasts.

The government, upon releasing its 2019 budget in November, forecast 2018 GDP growth of 0.3%, down from mid-year estimates of 1% and initial predictions of 2.4%. Meanwhile, the IMF, in its Article IV review released in December, predicted flat growth of 0%, on the back of a 6.8% contraction in the resources sector.

International interest in investment grows as PNG hosts APEC summit

Despite challenging circumstances, 2018 also saw PNG make its largest contribution to the international diplomatic scene in the country’s history by hosting the APEC summit in November.

Representatives from 21 Asia-Pacific countries descended on Port Moresby for the two-day summit, which was the first in APEC’s 29-year history to end without the release of a final joint-statement, mainly due to tension between the US and China.

However, the rivalry between the superpowers led to a series of key strategic investments for the host country throughout 2018, estimated at PGK9bn ($2.8bn) by consultancy PwC.

After signing onto China’s Belt and Road Initiative in June, PNG government officials announced in September that Chinese company Shenzhen Energy would lead the proposed PGK3bn ($922.4m), 180-MW Ramu 2 hydroelectric power project, to be located in the Eastern Highlands Province.

Although still awaiting final approval, the proposal will see Shenzhen take 70% ownership of the project, with the other 30% to be held by various state stakeholders. Construction is expected to begin in 2019 and be completed by 2024.

To counter Chinese influence, the US, Australia and Japan used the summit to unveil a $1.7bn project designed to help PNG achieve its aim of supplying electricity to 70% of the population by 2030, up from current levels of less than 15%. The programme will also be accompanied by the rollout of fibre-optic cabling to facilitate greater digital penetration across the country.

This followed the July announcement that Australia would fund a separate A$137m ($98.2m) undersea internet cable connecting it to PNG and the Solomon Islands.

Recovery of resources leads to positive outlook

These investments, along with an expected recovery of the resources sector, have led to a more positive short- and medium-term outlook.

The government, in its 2019 budget, has forecast annual GDP growth of 4%, while the IMF has projected a 3.8% expansion on the back of an 8.2% increase in the resources industries.

The budget foresees a 6.5% increase in revenues and grants, along with a 5.5% increase in expenditure, leaving a deficit of PGK1.9bn ($582.8m), a 1.6% reduction on 2018. Meanwhile, debt as a percentage of GDP is expected to continue to fall from 2018’s estimated level of 30.9% to meet the target of 25-30% by 2022.

Furthermore, the sentiment in the domestic business environment also appears strong. Some 71% of C-suite executives surveyed in the most recent OBG Business Barometer: PNG CEO Survey, released in June 2018, said it was either likely or very likely that their firms would make a significant capital investment in the next 12 months.

This positive sentiment in the economy was underlined by the issuance of a 10-year sovereign bond in September, the country’s first ever, which raised $500m and was oversubscribed by 600%.